Wednesday, 08 September 2021

Stellenbosch: Over the last 21 years of inflation targeting, the South African Reserve Bank (SARB) has largely succeeded in delivering on its objective, despite many challenges, says Governor Lesetja Kganyago.

Delivering a virtual keynote address on the country’s 21 years of inflation targeting, hosted by the University of Stellenbosch on Wednesday, Kganyago said lower inflation had generally benefitted the economy, including households of all income levels.

The public lecture coincides with the SARB’s 100 year anniversary and the rand turning 60 years old. This year also saw the commemoration of 25 years of central bank’s independence.

He said: “As lenders require less compensation for inflation, interest rates have come down. Furthermore, with expectations anchored inside the inflation target range, businesses no longer raise prices as soon as the exchange rate weakens. This credibility has helped us cut interest rates to record lows during the COVID-19 crisis – and we have been able to keep rates low during the recovery.

“This stands in stark contrast to some of our peers, where higher inflation has forced rate hikes, even though the pandemic is ongoing.”

Inflation targeting had asked a lot of the SARB and South Africans generally, “but not more than any of us could deliver”.

For a start, he said inflation targeting was more flexible than critics claim.

“It doesn’t require the central bank to cancel out every price shock using interest rates, or to have perfect forecasts. Shocks are inevitable, and so are forecast mistakes. What central banks need to do is convince people that they will do what it takes to steer inflation back to target, over a realistic timeframe.

“This is achievable and has repeatedly been achieved, with the key result that the expectations South Africans hold of future inflation have consistently been falling,” he said.

Similarly, said Kganyago, central banks have also tried targeting exchange rates – an objective that in many cases, including our own, has ended with billions of dollars thrown away for no tangible gain.

The country had avoided exchange rate adventurism throughout the inflation-targeting era, saying the policy had served South Africa well.

“The easiest way to destroy price stability in South Africa would be to insist on low interest rates because of unemployment. Our labour market is so dysfunctional, this excuse would rule out ever raising rates – a policy that would leave us in the worst case scenario of high unemployment and high inflation.”

This excuse, he said, “might have impressed people, and won us sympathy, but it would have been profoundly irresponsible”.

He said the country had not faced a tragic dilemma where there was no right answer – either jobs or inflation.

Responding adequately

“We have faced a necessary choice, to do the good we can do, understanding the limits of our powers. In making this choice, we have equipped ourselves to respond forcefully when there is a genuine cyclical downturn, beyond the structural labour market problems that have long blighted this economy.

While the COVID-19 pandemic had seen the country shed 1.5 million jobs, Kganyago said inflation was now back in the middle of the central bank’s target range, while interest rates were at record lows.

“If this were solely about inflation, we would have raised rates already. So never, let anyone tell you that the SARB only cares about inflation and ignores jobs. Rather, bear in mind that we have this power only because we put price stability first. We have anchored inflation expectations,” he said.

“We did not commit to an impossible mission.”

Since 2000, South Africa’s targeted-inflation had averaged 5.8%, which was within the 3–6% target range.

“It has been 4.5% over the past five years, exactly in the middle of our target range.

To some extent, the SARB’s success with inflation targeting also comes down to a fourth factor, which is good luck, he said.

“Unlike some other policy tasks, such as education, monetary policy can be delivered from a single head-office and maybe a few regional offices. Furthermore, thanks to factors such as our constitutional independence, we have been able to avoid State Capture, unlike many other organs of government,” Kganyago said.

He said this meant the central bank had remained focused on serving the public, instead of diverting resources to patronage networks.

“We must also acknowledge a helpful global environment. In pursuing low inflation, we have been able to draw on a wealth of global knowledge.” he said.